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Know the Cost

Andrew Morgan - Thursday, July 05, 2018

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

Hopefully we all love or enjoy what we do for a living, however we do not do it for the sport.  A business must produce a profit to survive.  Knowing how or what is needed to achieve a profit is a starting point.  In its simplest form, product cost plus mark-up equals selling price.

When a product or service is offered to a market, what it costs a business to purchase then get that product or service to the market in a position to sell is the breakeven point.

By understanding where the breakeven point is and what the product or service can be sold for in the market, one is able to know the following:-

  1. The profit level of the product or service
  2. The amount or volume of sales required to make a profit
  3. The impact on profit of declining tariffs/prices or volumes of sales
  4. The level sales can reduce to before a loss is incurred

The addition of a mark-up to make a profit and still be competitive then determines the price the product/service will be offered at.  The product of the motel room and associated services cost the operator to rent the room in wages, cleaning products, laundry/linen, electricity, insurance, wear and tear, etc.  A combination of fixed and variable costs.  If the total cost including these expenses and others are unknown, then how can the price be set to ensure the business is not losing money on the sale.  If a motel is selling a strong number of rooms at a solid occupancy rate however at the end of the month there is no money in the bank account, then alarm bells should be going off.

Accurate costs to rent a motel room offer very useful tools of measurement or key performance indicators (KPI’s), so a motel operator can know how much they can afford to rent a motel unit for to breakeven and then to make a profit.

Each different accommodation business/property will have different cost bases.  The reasons why can be due to several factors that affect this figure – property features, operation and utilities.

Property Features

  • Unit Size – the square metre area that the unit occupies.  A standard studio unit costs less to occupy than a 2 bedroom unit.
  • Self-Contained – the cleaning costs alone to rent a self-contained unit can be substantially higher
  • Age of Property – how old the property is may determine how much upkeep is required to the buildings
  • Standard of Property – if a motel is in disrepair it will require more expense to maintain
  • Location – sea air may increase corrosion of buildings such as metal staircase hand rails, roofing, etc.  Building movement in some areas may create brickwork cracking and other issues.
  • Unit Fit Out – what condition is the furniture and fittings in?  Does the high level of humidity require tiles rather than carpet?  Are blinds or block out curtains required?
  • Restaurant – a restaurant will substantially increase many costs, however this is a separate income department where the same considerations on what it costs to produce that product are relevant
  • General Services/Facilities – a lift on site, trees and gardens, swimming pool, spa or sauna are all services/facilities that contribute to the cost base
Operation
  • Lease/Freehold – Is the tenure leasehold with a rental to be paid each month, or is it freehold where mortgage repayments are due?  Interest rates will rise and fall changing repayment amounts.  Interest payments will be applicable with leasing as well however the level of borrowing will be generally lower than a freehold purchase.
  • Type of Clientele – the motel’s business could be corporate customers, tourists, families, contractors, etc
  • Laundry – is the linen cleaned onsite or offsite at a commercial laundry?
  • Staff Levels – are staffing levels correct or is the business over or under staffed?
  • Owner/Operator or Under Management – the cost of management wages will increase the cost to rent a motel unit.  This can be a moot point as the owner should expect to pay themselves a wage for their time anyway
  • Consumables – what type of soaps, tissues, shampoos, etc are included within the unit?
  • Cleaning – are the cleaning products the most cost effective?  How long are the cleaners allocated to clean each room, e.g. 20 minutes, 30 minutes, or unlimited?
  • Eftpos/Credit Card Fees – the fees charged by some credit card operators are higher than others
  • Marketing – is the motel a member of a chain?  The fees paid to a motel chain form part of the cost to rent a motel room, as does the commissions for booking sites and any other marketing initiatives.
Utilities
  • Property Rates - coastal motels may include much higher property rates than an inland motel where the land value is not as high as a beachfront property
  • Electricity/Gas – the costs of electricity have risen substantially in the past 3 years
  • Telephone – What type of phone system does the motel have?  Is it reliable in its charging of customers?
  • Land Tax – Is land tax paid by the property owner, Lessee or not applicable?
  • Insurance – the cost to insure properties has more than doubled in some areas over recent years
Costs easily add up and can “blow out” if not contained.  Knowing what the costs are is the first step in containment and an operator can then be confident in their sale price position.